Arm, the chip designer at the heart of the iPhone and an array of other “connected” devices, has defied expectations to post a 14pc rise in pre-tax profit this year despite stuttering smartphone sales.
The FTSE 100-listed company reported pre-tax profits of £138m in the first three months of 2016, while revenue climbed 22pc to £276m.
Arm, which earns income from microchip makers that pay to use its designs, grew royalty revenues by 25pc to £152m.
The chip designer takes a cut from the sale of every smartphone containing an Arm-based design. However analysts warned that its royalty revenues – which comprise more than half of its income – are due a slowdown amid concern that the smartphone market has hit saturation.
Cambridge-based Arm, which has grown rapidly on the back of Apple’s iPhone boom, also posted growth in its licensing division, which allows semiconductor makers to design chips based on its technology. Turnover in this division grew 16pc to £101m.
Sales of its physical intellectual property, which enables chip foundries to actually turn out its high-tech designs, fell 44pc to £8.7m.
Arm’s chief executive Simon Segars shrugged off the effects of a sluggish smartphone market, saying that other gadgets posed “fantastic opportunities” for the business.
He predicted a “robust” year for Arm, as mobile networks wake up to the growth of connected devices such as smart cars and household appliances hooked up to the internet.
“More and more devices are becoming digital, generating huge amounts of data that needs to be protected, transmitted, managed and stored across the internet,” Mr Segars said.
Of the 4bn Arm-based microchips shipped so far this year, 39pc are destined for so-called “internet of things” gadgets such as smart cars and wearable technology, compared with 45pc for mobile devices.
“As more companies need access to smart processors to build intelligence into more products, they will drive future royalty revenue,” Mr Segars said.
But the “story is changing” at the darling of the British technology sector, according to Robert Lamb, an analyst at Jefferies. The future of mobile is less certain, especially the price of smartphone chips, he warned.
“Arm has historically outperformed due to its profitable licensing division but the journey ahead is complex and risky,” Mr Lamb said.
Arm, which began as a start-up making computer parts in 1978, now employs 4,000 people; 1,600 of them are based in Britain.
Its biggest customer Apple recently said iPhone sales have hit their slowest growth rate since the gadget first hit the shelves in 2007, after a decade-long run of bumper revenues.